Economic contraction due to COVID-19 may lead some to believe that the price for home-grown building materials, lumber in particular, should reduce. Instead, multiple factors have worked in sync to cause steep lumber price increases across North America since March.
BTY has calculated that the lumber package for a small-town house development in Calgary today could cost upwards of 300% more than a package procured pre-COVID, adding around $7/sf to the overall cost of the build.
We also calculated the price impact on a 5-storey wood frame condo building in the city. Again, if the lumber package for that project were being procured today, it could add up to $12/sf to the build cost.
COVID-19 aggravated existing shortage
The lumber price rises are rooted in continuing supply woes. North America was already experiencing pre-COVID lumber supply shortages due to mill shutdowns caused by pine beetle infestation and forest fires prior to the pandemic starting. Then a surge in home renovations contributed to an increase in lumber demand by up to 60% during the lockdown and containment restrictions, with many mills and hardware stores running low on supply.
Continuing uncertain over availability of supply is fueling volatility in pricing. Suppliers are now holding prices firm for only three to five days from the time they quote customers. Typically, that price hold has been between 15 to 45 days.
Potential threats to profits, contingencies and lending
These sharp increases threaten to cut into developers’ profits and put their contingencies under pressure, as well as the flow of current funding from lenders. Should the lumber shortage grow even more acute, it may cause delays in construction schedules and spur contractor delay claims.
How to mitigate the impact
There are a number of strategies and measures that developers can take to protect their projects. Three immediate steps to consider are:
• Secure the supply of materials as quickly as possible in the event of further shortages;
• Build longer lead times for material orders into construction schedules; and
• Be sure to comply with contract terms with lumber suppliers to mitigate any changes in prices
It can also be helpful to seek professional advice from a firm such as BTY. We can assist on multiple fronts through:
• Preparing cost estimates based on market prices and intelligence
• Analysing how lumber price increases affect the overall development costs and impact on schedules
• Conducting value engineering exercises to align with pricing or budget constraints. For example, in some cases the introduction of steel stud into traditional wood frame buildings may be viable option.
In such times of uncertainty and volatility, the sooner action is taken, the better projects can be protected. While lumber prices will not stay high forever, they are likely here until well into 2021.